South Asian Free Trade Agreement
(SAFTA): Issues and Implications
Presented By:
Mohammad Muaz Jalil,
Senior Researcher and Trade Specialist,
I-PAG
Cost of Economic Non Cooperation to
Consumers in South Asia
COENCOSA
Project Review Meeting
Dhaka, June 28, 2011
Background
•
The large majority of the WTO Members are party to one or more RTAs.
•
As of January 2005, the WTO had been notified of 312 RTA
•
South Asian Association for Regional Cooperation (SAARC) was
established in 1985
•
In 70s and 80s, Inward-oriented development strategy, highly regulated
financial, fiscal and industrial policy, anti-export bias
•
Geared more towards import substitution rather than export led
development
•
Countries faced poor economic performance which provided incentive
for liberalization (Sri Lanka liberalized in 70s)
Background
•
The objectives of the treaty are sought to be achieved in the following
ways:
•
Eliminating barriers to trade and facilitating cross-border movement
of goods
•
Promoting conditions of fair competition and ensuring equitable
benefits, taking into account their respective levels and patterns
of economic development
•
Creating effective mechanisms for the implementation and
application of the agreement, for its joint administration and the
resolution of disputes
•
Establishing a framework for further regional cooperation to
expand and enhance mutual benefits.
SAFTA and SAPTA
•
South Asian Preferential Trade Arrangement (SAPTA) signed
in 1995 to promote trade and economic cooperation
•
Slow progress of SAPTA as it did not increase the volume of
intra-regional trade and investment flows
•
SAFTA more ambitious than SAPTA, the agreement entered
into 2006, with the provisions of its Trade Liberalization
Program scheduled to be fully implemented by 2016
•
SAFTA has six core elements: Trade liberalization programme;
Sensitive lists; Rules of origin; Non-tariff & para-tariff barriers;
Revenue compensation mechanism and Technical assistance for
LDCs
•
Agreement also allows for safeguard measures, allows partial
or full withdrawal of preference
Impact of South Asian Free Trade Area (SAFTA)
•
•
Several analyses of regional free trade in South Asia have
demonstrated minimal gains from trade expansion and unequal benefit
For intra-regional trade to expand it is important that the trade profiles
of the countries match
Country
•
Trade complementarity
index
Bangladesh–SARRC
1991
0.22
2004
0.33
India–SARRC
Pakistan–SARRC
0.28
0.63
0.41
0.34
Sri Lanka–SAARC
0.29
0.62
Trade profile more aligned, intra-regional trade in South Asia has a
potential to increase substantially.
Impact of South Asian Free Trade Area (SAFTA)
•
Between 1995 and 2005, intra-regional trade in South Asia hovered
around 5% of total trade of these countries.
•
Trade ranged between 20-60% in the case of many other regional
economic blocs
•
The net result of this economic non-cooperation among the SAARC
countries is high costs to consumers
•
It is estimated that trade between India and Pakistan could have been 70%
more than what it is today!
Barriers to Trade : Sensitive List
•
It is estimated that almost 53% of the total import trade in SAFTA
members has been subject to the negative lists of the respective
countries
Total Number of
Sensitive Lists
Country
Bangladesh
Bhutan
India
Maldives
Nepal
Pakistan
Sri Lanka
•
Non-LDCs
1,254
157
865
671
1,335
1,191
1,079
LDCs
1,249
157
744
671
1,299
1,191
1,079
Coverage of Sensitive List
as % of Total HS Lines
Non-LDCs
24.0
3.0
16.6
12.8
25.6
22.8
20.7
LDCs
23.9
3.0
14.2
12.8
24.9
22.8
20.7
Seriously inhibit intra-regional trade as well as significant reduction of
consumer welfare
Barriers to Trade : Sensitive List
•
India’s total imports from Bangladesh during the period 2005-06 were
US$127.03mn
•
Top 20 items that were imported from Bangladesh amounted to
US$60.16mn
•
Of these 10 items which are in India’s sensitive list for LDCs under
SAFTA,( constitutes 7.28 % of the total imports from Bangladesh)
•
Implies substantial market access for Bangladesh under SAFTA.
•
Over 70% of Bangladesh’s export includes mainly items of textiles &
textile materials, and shrimp.
•
Out of Bangladesh’s top 50 export items, 31 items are in India’s sensitive
list for SAFTA LDCs
Applied Research on SAFTA : Issues
•
Very little research has been done in this area; primary focus of most
research has been on producer surplus.
•
Primary focus on producer surplus, trade creation trade diversion, cost
minimization, least-cost suppliers
•
Redefining in terms of maximizing consumer surplus
•
Most common theoretical tool used : Computable General Equilibrium
(CGE) models and gravity models
Applied Research on SAFTA : CGE
•
CGE models often have several key driving forces that originate in their
social accounting matrix data base, algebraic structure and parameter
assumptions,
•
Whose influence on the model’s results remain hidden and open to
misattribution.
•
Restrictive assumptions : full employment, all firms earn zero profits, all
households are on their budget constraint
•
May fail to incorporate the trading arrangement characteristics like RoO,
and new products that become tradable following an FTA
•
Only passing references are made to consumer welfare gains/loss in such
exercises.
Applied Research on SAFTA : Gravity Model
•
Standard gravity model predicts bilateral trade flows based on the
economics sizes (GDP) and the (economic) distance
•
McCallum (1995): dummy variable if traded goods crossed a provincial
border (intra-US, intra-Canada trade
•
Anderson and Wincoop (2003) specification: Multilateral Resistance term,
otherwise omitted variable bias
•
Border effects have an asymmetric effect on countries of different size: they
have a larger effect on small countries.
•
The more resistant a country is to trade with all other countries, the more
it is pushed to trade with a given bilateral partner
Barriers to Trade : Beyond Borders
•
Evans (2003) : Differences in international and national transaction costs
and Policy-related barriers explained a significant part of the border effect
•
Effects of language, national networks, and social capital on transaction
cost very high
•
Geographical proximity has not translated into lower transport or
transactions costs for the SAARC countries (NTBs and Para tariff)
•
Para-tariffs : these charges are levied to bring import prices at par with
domestic prices but usually overcompensates
•
Greater integration and tariff reduction in Sensitive list may not increase
consumer welfare
Way Forward
•
Strong need for conducting research on evaluating the impact of SAFTA
on Consumer welfare
•
Need for identifying key policy and structural bottlenecks
•
Perception based survey may yield valuable and insightful information
however there might be perception bias:
•
Dreze and Sen (2002) showed that the incidence of reported
morbidity was higher in Kerala than in Bihar, a poorer state with
considerably higher mortality
THANK YOU